‘Tis the Season for Semis?

ETF Trends

Shares of Dow component Intel (INTC), the world’s largest semiconductor, have tumbled 4.3% in the past week after the company projected 2014 revenue of $52.6 billion. That is inline with this year, but below the $53.65 billion analysts are expecting for 2014.

Predictably, the Intel news has weighed on semiconductor exchange traded funds. In the past week, the iShares PHLX Semiconductor ETF (SOXX) is down a tenth of a percent while the Market Vectors Semiconductor ETF (SMH) is lower by 0.4%. Intel is almost 8% of SOXX’s weight and 19.1% of SMH’s weight.

Even with Intel’s recent struggles, all is not lost for the semiconductor. At least not if some seasonal trends kick in because December is the month in which the average book-to-bill rate for semiconductor companies starts to climb, according to The Seasonal Investor. The book-to-bill, or the ratio of orders received to products shipped, for semiconductor firms dips a bit in January before rising in February, March and April as the chart below indicates.

SOXX debuted in October 2010, so the sample set is not large, but the ETF has yet to close February at a lower price than where it closed the previous December. The equal-weight SPDR S&P Semiconductor ETF (XSD) , which because of its equal-weighting, is less dependent on the likes of Intel and Texas Instruments (TXN), has also finished higher in December-February time frame over the past three years. [Equal-Weight Semiconductor ETF Leads the Pack]

From mid-December 2011 through the end of February 2012, SMH jumped 18.4%. From December 2012 to February 2013, the ETF gained 10%. [Semiconductor ETFs Bounce Back]

Adding to the bull case for semiconductor ETFs is Qualcomm (QCOM). The company is “sitting on nearly $30 billion in cash. In the fiscal year that ended Sept. 29, the company bought back $4.6 billion worth of stock, reducing shares outstanding by 4%, and it has raised its dividend for 11 straight years,” reports Reshma Kapadia for Barron’s.

Qualcomm is SOXX’s second-largest component at a weight of almost 8%. Additionally, the fourth quarter is also usually a good time to chip equipment makers.

In the previous 10 fourth quarters, Applied Materials (AMAT), Advanced Semiconductor (ASX), KLA Tencor (KLAC) and OSI Systems (OSIS) have finished higher eight times, according to The Seasonal Investor. Applied Materials and KLA Tencor combine for over 9% of SOXX’s weight.

All three of the ETFs mentioned here are up at least 21% this year.

iShares PHLX Semiconductor ETF

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SOXX

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of Intel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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